Should You Invest in Thematic ETFs?

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ETFs are hot.

Assets managed by ETFs – exchange-traded funds – have swelled to $5 trillion globally, up from less than $700 billion before the financial crisis.

Trading in ETFs usually accounts for 25% to 40% of the daily volume in U.S. stock markets.

Today, there are more than 2,000 ETFs trading on U.S. exchanges. As a result, there’s probably an ETF for almost every obscure or hard-to-access market segment.

A subset of these specialized ETFs is “thematic ETFs.”

Thematic ETFs invest in specific, popular social, economic, corporate and demographic themes.

They tend to attract like-minded investors who make investment decisions not on a purely financial basis but on an affiliation or particular worldview.

Below are five examples of thematic ETFs…

1) Procure Space ETF (NYSE: UFO)

Elon Musk, Jeff Bezos and Sir Richard Branson are each working on making space travel more widely accessible. So if you are a space junkie, this may be the ETF for you.

The Procure Space ETF tracks a market cap-weighted index of global aerospace companies. The index invests in a wide range of companies, including satellite-based consumer products and services; rocket and satellite manufacturing, deployment, and maintenance; space technology hardware; ground equipment manufacturing; and space-based imagery and intelligence services.

A brand-new ETF, Procure Space has $6 million in assets under management and a high expense fee of 0.75%.

2) SPDR SSGA Gender Diversity Index ETF (NYSE: SHE)

Gender equality and women’s rights are prominent themes across today’s political landscape. This ETF allows you to support this cause with your hard-earned wealth.

The Gender Diversity ETF tracks a market cap-weighted index of U.S. large cap companies with women in high-level leadership roles. The fund evaluates the 1,000 largest U.S. firms for the ratio of women on the board of directors and in executive positions. Companies ranking in the top 10% in each sector are included in the portfolio, provided that there is at least one woman on its board or as CEO.

The Gender Diversity ETF has $269 million in assets under management and a low expense fee of 0.2%.

3) Inspire 100 ETF (NYSE: BIBL)

Some investors prefer to invest following the values of their traditional Christian faith. The Inspire 100 ETF tracks a market cap-weighted index of large cap U.S. stocks, selected based on the provider’s definition of biblical values and positive impact on the world.

The proprietary process identifies companies doing work to cure cancer, provide clean water solutions or otherwise benefit their communities, while excluding companies involved in activities that the religion deems immoral. The index selects the 100 highest-scoring securities and weights them by market cap.

The Inspire 100 ETF has $56 million in assets under management and a biblically acceptable expense fee of 0.35%.

4) Global X Longevity Thematic ETF (Nasdaq: LNGR)

Longevity is a concern for all of us, no matter what our faith or political affiliation is. The Longevity ETF tracks an index of equities from companies involved in life span extension and improved quality of life efforts for senior citizens.

The selection includes small cap, midcap and large cap companies from developed countries. The longevity theme cuts across a variety of sectors, including biotech, healthcare, medical devices and senior living properties.

The Longevity ETF has $15.5 million in assets under management and an expense fee of 0.5%.

5) Point Bridge GOP Stock Tracker ETF (CBOE: MAGA)

As the ticker symbol suggests, “Make America Great Again” is an ETF for Trump supporters. Specifically, the GOP Stock Trader ETF tracks an index of U.S. large cap companies whose employees and political action committees support Republican candidates.

The ETF ranks the components of the S&P 500 Index based on the total net dollars and the net percentage of dollars given to Republican Party candidates versus Democratic Party candidates for the same offices. The top 150 companies are included in the index. This strategy results in a narrow exposure to U.S. large cap stocks.

The GOP Stock Trader ETF has $17 million in assets under management and a high expense fee of 0.72%.

So Are Thematic ETFs a Good Investment?

From a pure investment standpoint, I am skeptical of many niche thematic ETFs. In my view, many are little more than marketing-driven gimmicks.

Providers simply throw something up on the wall to see what sticks. And oftentimes it doesn’t.

Consider the fates of the ETFMG Whiskey & Spirits ETF, the Republican Policies Fund and the Democratic Policies Fund… Each had to close up shop in 2018 due to lack of interest.

Here’s what’s most surprising to me…

Neither lousy returns nor higher fees seem to have much effect on the flows into thematic ETFs. Each of the five ETFs above has underperformed the S&P 500 over the past year.

Emotional connection trumps hard-nosed rationality.

Now, I can’t say that I’ll never recommend a thematic ETF in my Oxford Wealth Accelerator trading service. (In fact, a handful of themes are powerful.)

But do I see myself ever recommending an ETF based on religious or political affiliations? Highly unlikely.

Good investing,

Nicholas

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